Equity When Buying a House: How Much You Really Need

Why equity is so important when buying a house

Equity is the part of the purchase price and the incidental costs that you raise from your own funds without taking out a loan. The more you contribute yourself, the smaller the loan that you repay over the years. This lowers the monthly burden, shortens the term and protects you in difficult phases.

From the bank's perspective, equity reduces the risk. Anyone who finances only part of the purchase price is regarded as a safer borrower and therefore usually receives better terms. Equity thus has a double effect: it reduces the debt burden and often improves the interest rate at which you can finance at all.

Just as important is the psychological and practical buffer. A property repeatedly brings unexpected expenses, from a new heating system to a leaking roof. Anyone who puts their last money into the purchase price is under pressure at the first major repair. Equity creates peace of mind.

The incidental purchase costs: the absolute minimum equity

Before you think about the purchase price, you should know the incidental purchase costs (Kaufnebenkosten). They are added to the purchase price and are financed by banks only in exceptional cases. In North Rhine-Westphalia they are typically made up as follows:

• Real estate transfer tax: In NRW it amounts to 6,5 percent of the purchase price. That is one of the highest rates in Germany.
• Notary and land register: For notarising the purchase contract, the entry in the land register and the land charge, together around 1,5 to 2 percent are incurred.
• Broker's commission: If a broker is engaged, the buyer's share in NRW is usually around 3 to 3,57 percent including value added tax. Since the law on splitting broker costs of December 2020, for owner-occupied flats and single-family houses the buyer may bear at most half of the total commission if the seller commissioned the broker.

In total this means for buyers in NRW roughly 8 to 9 percent of the purchase price without a broker and about 11 to 13 percent with a broker. These incidental costs are the absolute minimum that you should have available as equity, because they create no asset value that a bank could lend against.

Rules of thumb: how much equity makes sense?

There is no rigid mandatory quota, but tried-and-tested guidance that Finanztip, Stiftung Warentest and the consumer advice centres also state in a similar form:

• At least the incidental purchase costs: You should always pay these out of your own pocket. In NRW that is roughly 10 percent of the purchase price, depending on broker involvement.
• Solidly positioned with 20 to 30 percent: Anyone who contributes around 20 percent of the purchase price in addition to the incidental costs, so that around 20 to 30 percent equity comes together in total, finances significantly more cheaply and more safely.

A simple example: at a purchase price of 400.000 euros, the incidental costs in NRW lie roughly between 35.000 and 50.000 euros. Anyone who additionally contributes around 80.000 euros towards the purchase price moves within the recommended range of about 20 percent equity plus incidental costs.

More equity is almost always better, as long as you keep a sufficient reserve. It is not sensible to deploy your last savings in full and move into your own property without any reserve.

How equity improves the rate and terms

The decisive lever is called loan-to-value (Beleihungsauslauf). This refers to what proportion of the property value is financed via the loan. In simple terms: loan amount divided by purchase price or mortgage lending value. The bank often determines the mortgage lending value somewhat more cautiously than the pure purchase price.

In practice, banks work with tiers. As rough guidance: up to about 60 percent loan-to-value there are often the best rates, up to around 80 percent still good terms. Above that, so from about 90 or even 100 percent, the rates rise noticeably, because the bank prices in a higher risk. There are no binding, nationwide uniform rate jumps; the gaps range, depending on the bank and creditworthiness, from a few tenths to several tenths of a percentage point.

Concretely, this can make a big difference: with a loan of several hundred thousand euros and a fixed-rate period over many years, even small interest differences add up to five-figure amounts. More equity lowers the loan-to-value, improves the rating and can additionally reduce ancillary costs such as commitment interest.

What all counts as equity

Equity is more than the balance in your current account. Depending on availability and proof, banks recognise various assets:

• Savings: Balances in current, overnight and fixed-term deposit accounts are the simplest and most readily creditable equity.
• Building society savings: The saved portion counts; depending on the contract, allocation maturity plays a role, because not every balance is immediately available.
• Securities: Shares, funds and ETFs are mostly counted only at the current market value and often with a safety discount, because prices fluctuate.
• Own work, the so-called sweat equity (Muskelhypothek): Work performed yourself in building or renovating can be recognised, but only when realistically calculated and usually not in full. Pure material costs do not count as own work.
• Gifted or inherited money: Contributions from parents or grandparents are a widespread component. For children, a gift tax allowance of 400.000 euros per parent applies within ten years.
• Life insurance: Capital-building policies count with their current surrender value, not with the later target sum.

Important: each bank values these items with its own discounts. What matters is how safely and quickly the money is available.

Full financing, 100 and 110 percent financing and their risks

Sometimes a property is financed entirely without or with very little equity. Two terms are common: with 100 percent financing, the bank pays the entire purchase price and the buyer raises the incidental costs themselves. With 110 percent financing, the bank additionally finances the incidental costs, so more than the pure purchase price.

Such full financing is possible, but brings clear risks with it:

• Higher interest rates: Without equity the bank lacks the safety buffer, which makes the loan noticeably more expensive.
• Longer repayment: The larger loan amount often allows less repayment for the same budget, so getting out of debt takes longer.
• Residual debt risk: If the property had to be sold unexpectedly, for example on separation or unemployment, the proceeds may fall below the residual debt. Then debts remain without any asset value.
• Interest-rate change risk: Anyone coming out of the fixed-rate period heavily in debt meets a larger residual debt and possibly higher interest rates on the follow-up financing.

Consumer advocates therefore advise full financing only with a very stable, sufficiently high income, secure employment and a clear risk buffer.

Proving equity and clever tips

So that the bank recognises your equity, you have to document it. Depending on the type of capital, the following are common:

• Account statements of the last months for balances in current, overnight and fixed-term deposit accounts.
• Securities account statements with the current market value for securities.
• Building society account statement or status notice for building society savings.
• Insurance documents with the current surrender value for life insurance.
• A gift contract or written confirmation from the donor together with proof of transfer for gifted money.
• A comprehensible breakdown of the planned works and hours for own work.

Three tips from practice: first, keep a liquidity reserve. Consumer advocates recommend choosing the instalment so that there is still room in the household budget and a cushion for unforeseen expenses remains after the purchase. Second, gather proof early, that speeds up the financing. Third, plan the incidental costs separately from the start and do not calculate too tightly.